STATE ACCIDENT FUND

8 Major Workers’ Comp Mistakes

by Frank Pennachio, CWCA on March 7, 2008

on Business Management Daily

Fourth Quarter 2011

Table of Contents

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8 Major Workers’ Comp Mistakes

Working Outdoors in Warmer Climates

Legal Update

“Protecting you since 1943.”

Safe-mail second Quarter 2012

Prescription Saving without Healthcare Sacrifices

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ness practice and a means for improving the bottom line.

Rather than diverting attention and finances during periods of lower Workers’ Compen-sation rates to other business priorities, employers can benefit by taking steps to guarantee long-term savings. Here are eight mistakes employers should avoid so they can achieve long-term Workers’ Compensation savings:

1. Confusing lower premium rates with cost reductions

Many employers are surprised to learn that a reduction in rates does not always mean a reduction in costs. Let’s begin with a basic understanding of what determines the cost of Workers’ Compensation insurance. Unlike other insurance, Workers’ Compen-sation functions like a credit line to finance the costs of injuries. As such, rates alone do not determine the overall cost. An Experi-ence Modification Factor (Mod) tailors the cost of insurance to the individual loss per-formance of an employer. A Workers’ Compensation premium is calculated by this formula: Rate x $100 Payroll x Experience Modifier.

The Mod calculation is complex. But an employer generally is compared with similar employers in the same industry classifica-tion, and if past losses are lower than aver-age, a credit rating reduces the premium. Conversely, if past losses are higher than average, a debit rating can actually increase

“With lower prices, it's easy to shift focus away from

injury management and cost containment to other, more

pressing business matters.”

continued on page 5 …

Concerned About the Cost of Your Premium? 4

Throughout much of the country, declining Workers’ Compensation rates are music to em-ployers’ ears. After all, that seems like long-awaited good news, particularly since Workers’ Compensation is, more often than not, viewed as a necessity and a significant cost of doing busi-ness.

Yet, looking at Workers’ Compensation as a business necessity or a commodity is a major fallacy. Although most employers fail to recog-nize it, Workers’ Compensation is a core busi-

costs in spite of lower rates.

2. Becoming complacent

Declining rates act as blinders for many em-ployers. With lower prices, it's easy to shift focus away from injury management and cost containment to other, more pressing business matters.

While increased attention to safety led to a decline in the number of workplace accidents, which resulted in fewer claims and lower rates, claim frequency is only one part of the equation. The other part, claim cost including indemnity (lost wages) and medical care, con-tinues to rise.

In many industries where there are tight labor markets, wage gains are expected to trend higher, suggesting further increases in indem-nity severity. At the same time, medical care costs have marched relentlessly upward since the mid-1990s.

Even more disturbing is the fact that the growth in Workers’ Compensation medical costs has been much steeper than in the health care industry as a whole, indicating that not only medical inflation but a mix of services and overutilization are driving up costs.

If claims remain open and injury costs esca-late, reserves (estimate of ultimate cost of injury) rise and adversely affect the em-ployer’s Experience Modification Factor, thus increasing costs. Employers need to under-stand what is impacting medical costs and measure key metrics such as cost per claim

Working Outdoors in Warmer Climates

Guidelines by:

State Accident Fund Safe-mail second Quarter 2012

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precautions. Here’s how: • Drink small amounts of water frequently. • Wear light-colored, loose-fitting, breathable clothing—cotton is

good. • Take frequent short breaks in cool shade. • Eat smaller meals before work activity. • Avoid caffeine and alcohol or large amounts of sugar. • Work in the shade. • Find out from your health care provider if your medications and

heat don’t mix. • Know that equipment such as respirators or work suits can increase

heat stress. There are three kinds of major heat-related disor-ders—heat cramps, heat exhaustion and heat stroke. You need to know how to recognize each one and what first aid treatment is necessary.

Lyme Disease/Tick-Borne Diseases These illnesses (i.e., Rocky Mountain spotted fever) are transmitted to people by bacteria from bites of infected deer (blacklegged) ticks. In the case of Lyme disease, most, but not all, victims will develop a “bulls-eye” rash. Other signs and symptoms may be non-specific and similar to flu-like symptoms such as fever, lymph node swelling, neck stiffness, generalized fatigue, headaches, migrating joint aches, or mus-cle aches. You are at increased risk if your work outdoors involves construction, landscaping, forestry, brush clearing, land surveying, farming, railroads, oil fields, utility lines, or park and wildlife manage-ment. Protect yourself with these precautions: • Wear light-colored clothes to see ticks more easily. • Wear long sleeves; tuck pant legs into socks or boots. • Wear high boots or closed shoes that cover your feet completely. • Wear a hat. • Use tick repellants, but not on your face. • Shower after work. Wash and dry your work clothes at high tem-

perature. • Examine your body for ticks after work. Remove any attached ticks

promptly and carefully with fine-tipped tweezers by gripping the tick. Do not use petroleum jelly, a hot match, or nail polish to re-move the tick.

West Nile Virus West Nile virus is transmitted by the bite of an infected mosquito. Mild symptoms include fever, headache, and body aches, occasionally with a skin rash on the trunk of the body and swollen lymph glands. Symptoms of severe infection include headache, high fever, neck stiff-ness, stupor, disorientation, coma, tremors, convulsions, muscle weakness, and paralysis. You can protect yourself from mosquito bites in these ways: • Apply Picaridin or insect repellent with DEET to exposed skin. • Spray clothing with repellents containing DEET or permethrin.

“Hot summer months pose special hazards for outdoor workers who

must protect themselves .”

Hot summer months pose special hazards for outdoor work-ers who must protect themselves against heat, sun exposure, and other hazards. Employers and employees should know the potential hazards in their workplaces and how to manage them. Sun Sunlight contains ultraviolet (UV) radiation, which causes premature aging of the skin, wrinkles, cataracts, and skin cancer. There are no safe UV rays or safe suntans. Be especially careful in the sun if you burn easily, spend a lot of time outdoors, or have any of the following physi-cal features: numerous, irregular, or large moles; freckles; fair skin; or blond, red, or light brown hair. Here’s how to block those harmful rays:

• Cover up. Wear loose-fitting, long-sleeved shirts and long pants. • Use sunscreen with a sun protection factor (SPF) of at least 30. Be

sure to follow application directions on the bottle or tube. • Wear a hat. A wide brim hat, not a baseball cap, works best because

it protects the neck, ears, eyes, forehead, nose, and scalp. • Wear UV-absorbent sunglasses (eye protection). Sunglasses don’t

have to be expensive, but they should block 99 to 100 percent of UVA and UVB radiation. Before you buy sunglasses, read the prod-uct tag or label.

• Limit exposure. UV rays are most intense between 10 a.m. and 4 p.m.

Heat The combination of heat and humidity can be a serious health threat during the summer months. If you work outside (for example, at a beach resort, on a farm, at a construction site) or in a kitchen, laundry, or bakery you may be at increased risk for heat related illness. So, take

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State Accident Fund Safe-mail second Quarter 2012

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Prescription Savings Without Healthcare

Sacrifices

The SAF has been receptive to recommendations we make, and has

gone above and beyond to lower prescription cost for their clients.

The SAF has an in-network penetration rate of 99.2%. In other words,

the SAF processes 99.2% of their bills through the CPS network,

thereby accessing pharmacy contracted rates that are vastly below the

South Carolina fee schedule. This capture rate is virtually unattainable

in the workers’ compensation marketplace and is one of the highest in

the nation. CPS looks forward to continuing its partnership with the

SAF to continue to deliver lower prescription cost while not compro-

mising the healthcare of the injured worker.

Paige Bowlinlg, CPS

“Employers and employees

should know the potential

hazards in their workplaces and

how to manage them.”

Insurance payers are often faced with difficult decisions when it comes to containing their prescription costs associated with workers’ compen-sation claims. Because of this, Corporate Pharmacy Services (CPS) cre-ated a pharmacy benefit management program specific to workers’ compensation claims. Since our inception in 1990, we have partnered with our clients and made it our exclusive aim to ensure that their claimants are receiving the appropriate medications while also focusing on reducing the cost burden for all claim payers. CPS continues to op-erate as an independent company including our wholly owned mail order pharmacy located at our corporate headquarters in Gadsden, AL. By putting the State Accident Fund (SAF) first, CPS has been able to build our program around what positively impacts the SAF and CPS alike. This is evidenced by the fact that since the program inception in December 2006 we have saved the SAF $6,083,080 in prescription cost. After the first year of the program the percentage savings below the fee schedule was 25.54%. In 2011, the savings below fee schedule was 32.33%. The key factor in the increase in savings is the generic utilization rate (GUR). In the first year of the program the GUR was 59.33%. In 2011 this number increased to 72.79%. The SAF has put safeguards in place to ensure a continued rise in the GUR, thereby low-ering the cost to its clients.

(Note: Do not spray permethrin directly onto exposed skin.) • Wear long sleeves, long pants, and socks. • Be extra vigilant at dusk and dawn when mosquitoes are most active. • Get rid of sources of standing water (used tires, buckets) to reduce

or eliminate mosquito breeding areas. Poison Ivy-Related Plants Poison ivy, poison oak and poison sumac have poisonous sap (urushiol) in their roots, stems, leaves and fruits. The urushiol may be deposited on the skin by direct contact with the plant or by contact with contami-nated objects, such as clothing, shoes, tools, and animals. Approxi-mately 85 percent of the general population will develop an allergy if exposed to poison ivy, oak or sumac. Forestry workers and firefighters who battle forest fires have developed rashes or lung irritations from inhaling the smoke of burning plants.

• Wear long-sleeved shirts and long pants, tucked into boots. Wear cloth or leather gloves.

• Apply barrier creams to exposed skin. • Educate workers on the identification of poison ivy, oak, and sumac

plants. • Educate workers on signs and symptoms of contact with poisonous

ivy, oak, and sumac.

• Keep rubbing alcohol accessible. It removes the oily resin up to 30 minutes after exposure.

For more details on these outdoor exposure risks or other safety ques-tions, you may go to www.osha.gov or contact the State Accident Fund and ask for Barney Derrick 803-896-5935 or Ray Coleman at 803-896-5855.

Remember: Promoting safety is the best way to combat rising work-ers’ compensation premiums. Any improvement in safety can quickly translate into savings. In the process of promoting safety, members can gain other essential benefits such as higher quality of work, improved morale, higher productivity, and better net returns.

Outdoors, continued from page 2 …

“Class codes are the building blocks of your workers’

compensation premium.”

State Accident Fund Safe-mail second Quarter 2012

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Workers’ Compensation Premiums are based on payroll dol-lars. But every policy puts their payroll dollars into class codes to determine the cost. What are class codes? Class codes are 4 digit codes used to classify the risk level of your agency. Examples of common class codes include:

9033 Housing authority & clerical, salespersons, drivers 8868 College Professional employees & Clerical Employees 9101 College – All other Employees 8864 Social Services Organizations- all employees

What is the purpose of class codes? They are the building blocks of your insurance premium. Think of them as a prod-uct price or unit price of workers’ compensation insurance. It’s where the cost of workers’ compensation premiums be-gins.

Where do classification codes come from? The National Council on Compensation Insurance (NCCI) issues and main-tains the class codes for the workers compensation industry. There is a standard set of codes that apply to most states in the nation. Of few states, such as Texas, California, Pennsyl-vania and Delaware, have written their own class codes and do not use the standard NCCI codes. South Carolina has adopted the NCCI codes and uses them in workers’ compen-sation premium pricing. As a result, The State Accident Fund uses the class codes issued from NCCI because it is a uniform standard of the workers’ compensation industry in South Carolina. Currently, there are over 600 NCCI codes avail-able, nationally. This number is subject to change frequently as class codes are revised and edited by NCCI.

How do class codes determine my premium? Each class code carries a price per hundred dollars of payroll. Each insurer determines the price they charge for each class code. The price is based on the risk level for the workers in that code. For example, class code 8810 Clerical Employees may carry an average rate $0.040 per hundred dollars of payroll. Code 5551 Roofing may carry an average rate of $40.00 per hun-dred dollars of payroll. The rate for the roofer is higher be-

cause the risk of getting injured while working on a roof is significantly higher than working in an office.

There are hundreds of class codes in between these two exam-ples to classify all sorts of operations with a variety of risk levels. NCCI has over 600 class codes nationally. Which class code is right for your agency? Are the class codes on your current policy correct? How can you know? A qualified premium auditor can help you determine if you are using the correct class codes on your policy. The auditor can visit and discuss your agency’s operations in detail and recommend a class code (or codes) that best fit your opera-tions. The auditor can also discuss record keeping methods that would help match your payroll and premium dollars to each type of operation.

Why go through this process? Your policy may not be carry-ing the correct class codes, which is affecting your cost. Incor-rect class codes can lead to inaccurate premium dollars. You may have too many class codes on your policy. A large num-ber of class codes can often drive up the cost of workers’ compensation premiums. Additionally, there are detailed rules in applying the class codes that an agency may not be aware of. This is why the help of a qualified premium auditor is needed to help you determine the correct class codes for your agency operations.

The State Accident Fund has well qualified, experienced pre-mium auditors who can assist you in reviewing the class codes on your policy. They are happy to meet with you to discuss your operations and the class codes that are available. Please contact Premium Auditors, Kirk Adair at 803-896-5856 kadair@saf.sc.gov or Theresa Simmons at 803-896-5857 Tsimmons@saf.sc.gov.

Concerned about the cost of your Premium? Maybe you need a review of your classification codes.

Kirk Adair, Premium Auditor

“If a work-related injury is not managed

properly, it can result in the unnecessary

loss of a skilled, trained employee.”

State Accident Fund Safe-mail second Quarter 2012

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trends adjusted for diagnosis and severity.

3. Focusing on direct costs only

Ask a businessperson how much he or she spends on Workers’ Com-pensation and almost all will respond with the price of the premium. Yet, the direct costs of Workers’ Compensation often represent only 20 to 30 percent of the overall injury expenses.

Indirect costs, including overtime, temporary labor, increased train-ing, supervisor time, production delays, unhappy customers, increased stress, and property or equipment damage represent several times the direct cost of the injury. A 2002 Safety Index report by Liberty Mutual tallied the direct cost of workplace injuries at $40.1 billion. The total financial impact of both direct and indirect costs was estimated to be as much as $240 billion.

Injury costs, both direct and indirect, will have a much greater impact on an employer’s overall costs than rate decreases.

4. Thinking rates will stay low

Historically, the Workers’ Compensation price cycle has repeated in a predictable pattern: Rates decline, insurance is purchased for a lower price, employers shift focus away from Workers’ Compensation, claim costs do not fall in relationship to reduced rates and employers’ Mod increases, legislative reforms erode or become ineffective, insurance company profits diminish and rates increase.

During a declining rate cycle, the plan expects that if rates go down, so should injury costs. If employers do not manage injury effectively and claims do not go down, the employers’ Mod will go up. When rates rise again, the increased Mod will wipe out any savings garnered dur-ing the declining rate cycle.

5. Viewing Workers’ Compensation as an expense

Employers should recognize that Workers’ Compensation is more than a necessary expense; it is a controllable aspect of business that, if man-aged properly, will have a measurable and positive return on invest-ment (ROI).

In “ROI Selling,” authors Michael Nick and Kurt Koenig note three measures of ROI, writing, "Return on investment occurs when a com-pany realizes an increase in revenue, a reduction in cost or an avoid-ance of cost."

Viewing Workers’ Compensation as an ongoing process and not an expense can accomplish all three. When injuries do occur, employers

can increase their revenues by getting employees back to work quickly and reduce their costs by managing the injury effectively. By rec-ognizing that Workers’ Compensation begins at the date of hire, employers can avoid costs by hiring the right people.

6. Separating Workers’ Compensation from employee retention

Retaining skilled employ-ees is one of the most diffi-cult challenges facing businesses today. Turnover is extremely costly. According to estimates it is anywhere from 50 to 150 per-cent of an employee's annual salary.

If a work-related injury is not managed properly, it can result in the unnecessary loss of a skilled, trained employee. The longer employ-ees are away from the job, the less likely they are to return. Statis-tics show that if employees are not back to work within 12 weeks, they only have a 50 percent chance of ever returning.

The fundamental reason for most lost time is not medical necessity but the non-medical decision making and lack of a process that oc-curs after an employee is injured. The workplace response is key: Studies show employees’ satisfaction with their employer’s re-sponse has a much larger impact on employment stability than their satisfaction with healthcare itself. Being guided by a plan that fo-cuses on communication and return to work will be far more effec-tive than declining rates in both reducing Workers’ Compensation costs and improving productivity.

7. Devaluing your relationship with the insurance com-pany or agency

In a time of declining rates and new competition, there is a ten-dency to shop for the lowest price. The insurance industry is not immune to the old adage, “You get what you pay for.” Chasing the lowest rate can result in poor service or having to deal with an in-surance company’s unstable finances. In every “soft market” cycle, insurance companies have gone bankrupt and been unable to pay claims. It is critical for employers to investigate the insurer’s stabil-ity as well as its long-term commitment to the Workers’ Compen-sation market to mitigate the possibility of a financial failure.

Furthermore, selecting an agent and carrier with an excellent un-derstanding of Workers’ Compensation is very important. The

8 Major Workers’ Comp Mistakes … continued from page 1…

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“The goal is to bring all interested parties together with the aim of

settling a case amicably without the need for litigation at a hearing.”

State Accident Fund Safe-mail second Quarter 2012

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The latest news from the South Carolina Workers’ Compensation Commission is that a regulation has been proposed and passed by the Commission regarding me-diation in certain cases. In the American Heritage Dic-

tionary for the English Language, the term “mediation” is de-fined, quite simply, as “An attempt to bring about a peaceful settlement or compromise between disputants through the ob-jective intervention of a neutral party.”

For those of you unfamiliar with mediation in the legal system, that is exactly what mediation attempts to do. The goal is to bring all interested parties together with the aim of settling a case amicably without the need for litigation at a hearing. In the workers’ compensation setting, what you can expect to see is a scenario such as the following. A mediator will be selected and that mediator will invite all parties to be present at a specific date and time. The mediator himself or herself will be a neutral person, usually someone very knowledgeable in the field of workers’ compensation and respected by all parties involved.

The cooperation of each party is equally important as the qualifications of the mediator. The injured worker will need to be present along with his or her lawyer. On the other side, there will be a defense lawyer together with an adjuster with sufficient authority to settle the case. Ideally, there will be a representative of the Employer at the mediation as well, to en-sure that the Employer is aware of the proceedings and active in their participation.

The mediation starts off with the lawyers from each side making opening statements to present the cases of their respective clients. The mediator may or may not ask a few questions to clarify the issues and, often, the injured worker and/or the Employer representative may be asked if they have anything they would like to add. Afterwards, each side will adjourn to different rooms and the mediator will go back and forth between the rooms presenting settlement offers and counter-offers from the respective parties. In the process, the mediator, relying on his or her experience, will work with the

parties, pointing out the strengths and weaknesses in each side’s case and coaxing them incrementally to move closer to each other’s position.

If the mediation is successful, then the parties will arrive at an agreement somewhere in between the point at which each party started and the case is resolved amicably. If the mediation is unsuccessful, than the parties reach a point called an impasse, at which the parties agree the case cannot be resolved at the mediation. At that point, the case will usu-ally be scheduled for a hearing. It should be noted, however, that the vast majority of cases that go to mediation are re-solved without a hearing. For that reason, North Carolina has made mediation mandatory in all cases before a hearing will be scheduled before the North Carolina Industrial Commis-sion, with the proviso that mediation can usually be avoided via motion if both parties agree it would not benefit the case. So, assuming the proposed regulation is approved by the leg-islature what will mediation look like in South Carolina?

First, not all cases will be subject to mandatory me-diation. However, any Commissioner will have the discre-tion to order mediation in any case if he or she deems it bene-ficial. The cases that will automatically require mandatory mediation are the more complicated ones. These consist of occupational disease cases, third-party lien reduction claims, contested death claims, mental/mental injury claims, and cases of concurrent jurisdiction under the South Carolina Workers’ Compensation Act and the Federal Longshore and Harbor Workers’ Compensation Act. It should be noted that, except for contested death claims, only admitted cases will be subject to mandatory mediation. Denied claims will still be litigated at a hearing unless the parties agree to partici-pate in a voluntary mediation of their claim. This option will be available to the parties in all cases. Again, however, the Hearing Commissioner will have the authority to order a me-diation in any case deemed necessary.

The procedure for mediation will be straightfor-ward. The parties will be allowed to request mediation when they file a Form 50, Form 21, response to Form 21 or Form 51. If one party requests mediation in this manner, then the other party will have the opportunity to object to mediation in their response to the appropriate form. With regard to selection of the mediator, the parties can consent to use any mediator who is certified by the Supreme Court. If the par-

Legal Update by Matt Robertson

continued on page 7 …

State Accident Fund Safe-mail second Quarter 2012

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South Carolina State Accident Fund

“Protecting you since 1943.”

added benefits of improved hiring practices, medical relationships and comprehensive injury management services will reduce both the num-ber of claims and the costs of claims, resulting in a lower Mod. Unlike declining rates, a reduced Mod is a guaranteed way to drive down costs over the long term.

8. Measuring the wrong thing

Prominent statistician John Tukey, Ph.D., said, “When the right thing can only be measured poorly, it tends to cause the wrong thing to be measured well. And, it is often much worse to have a good measurement of the wrong thing, especially when it is so often the case that the wrong thing will, in fact, be used as a indi-cator of the right thing, than to have a poor measure of the right thing.”

When Workers’ Compensation is treated as a commodity, the decision is reduced to the lowest possible common denominator: price. This shortsighted approach is equivalent to expecting gourmet food on a fast food budget. If employers are not measuring the true financial impact of work-related injuries, they cannot effectively manage them.

Viewing Workers’ Compensation as a core business practice of com-

prehensive risk management, the focus shifts from price to tangible metrics that are driving claims costs. With this information, em-ployers can address the underlying circumstances and conditions that are pushing up work-related injury costs and measure the

value of their actions.

The declining rate period provides an opportunity and a challenge for employers. The opportunity is to use the “found” money to imple-ment practices that will improve their company and profits: better hiring, injury management and improved education and training. The one constant that separates employers from their competitors is their workforce. The challenge is to protect it.

Frank Pennachio, CWCA, is the co-founder and director of curriculum for the Institute of WorkComp Professionals, an organization that tests and certifies insurance professionals with the skills

and knowledge necessary to alert employers about the hidden costs and overcharges in the workers’ compensation insurance system.

© 2012 Penton Media, Inc.

Mistakes, continued from page 5 …

ties cannot agree on a mediator within ten days, then the Commissioner will have the authority to appoint one. The mediation itself must be complete within sixty days of filing.

In addition, the parties shall provide a representa-tive, who shall attend the mediation in person or via tele-phone. The representative should have authority to enter into negotiations, in good faith, to resolve the issues in dis-pute. This means the person who has the ability to grant set-tlement authority must be present in person or via phone. They will be entitled to reasonable notice of the mediation. Also, all communications and statements, whether oral or written, which take place within the context of mediation shall be confidential and not subject to disclosure. Such com-munications or statements shall not be disclosed by any me-diator, party, attorney, or attendee and may not be used as

evidence. This means that admissions or compromises for the purpose of attempting to get the case resolved will not be admissible as evidence at a later hearing. The purpose of this rule is to facilitate an open dialogue between everyone pre-sent at the mediation and ease the path to settlement. Finally, any party who refuses to attend the mediation or who does not act in good faith while at the mediation will be subject to potential fines and penalties by the Commission.

Again, it should be noted that this is still in the pro-

posed regulation stage. It must still be approved by the state

legislature before it becomes law. However, once approved,

it may well change the landscape of South Carolina workers’

compensation.

Mediation, continued from page 6